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05/23/2019
10 Questions: The Wayfair Decision - An Update
On June 21, 2018, the United States Supreme Court issued its decision in South Dakota v. Wayfair, Inc., 585 U.S. __ (2018), dramatically changing the sales tax landscape for multi-state retailers. Since that time, 38 states have distributed guidance as to how they expect the Wayfair decision to be applied within their respective jurisdictions, with more to follow.
As this decision has had immediate – and significant – implications to all taxpayers making remote retail sales – of services or tangible property, CohnReznick has developed a portal for our clients and contacts. However, we feel it is imperative every organization who could be impacted become well versed on the procedural changes that will need to take place to keep on top of what is our new reality.
Below are a series of questions asked by attendees of this webinar with answers provided by our CohnReznick subject matter experts.
Q. How have states responded to the Wayfair ruling?
A. After the U.S. Supreme Court issued its opinion in South Dakota v. Wayfair on June 21, 2018, most states swiftly enacted legislation implementing economic nexus and instituting different thresholds to trigger registration and collection obligations, including some with retroactive effect (e.g., Massachusetts). Some states, however, began enforcing economic nexus provisions that were already on the books (e.g., New York).Q. Is relief available for late sales and use tax registration or filings?
A. Some states have instituted tax amnesty or voluntary disclosure programs to provide relief to taxpayers faced with registration and compliance obligations under economic nexus.Q. What sales are counted when computing the sales volume thresholds for purposes of determining whether a taxpayer has economic nexus in a jurisdiction?
A. The sales volume thresholds for purposes of determining whether a seller has economic nexus in a jurisdiction consists of the seller’s total sales into the state. Thus, a seller making both retail and wholesale sales must include both types of sales for purposes of determining whether it has exceeded the applicable economic nexus thresholds.Q. How are the sales volume thresholds computed for purposes of determining whether a taxpayer has economic nexus in a jurisdiction?
A. The computation of the sales volume thresholds varies from state to state. In New York, for example, the threshold of $300,000 in sales or 100 transactions is based on the immediately preceding four sales tax quarters. In Nevada, however, the $100,000 in sales or 200 transactions threshold is based on the taxpayer’s previous or current calendar year.Q. Are charges for professional services subject to sales and use tax?
A. Sales of enumerated services are taxable unless an exemption applies. Although most states do not include sales of professional services in the list of enumerated taxable services, Hawaii, New Mexico, and South Dakota do tax professional services, including accounting services and management consulting services. Connecticut, however, taxes management consulting services but not accounting services.Q. Are charges for software that is delivered electronically subject to sales and use tax?
A. It depends. In New York, for example, the sale of prewritten (or canned) computer software is a taxable sale of tangible personal property, independent of how the software is conveyed to the purchaser. In Virginia, however, remotely accessed computer software is not considered tangible personal property and is thus not subject to tax.Q. Are charges for software maintenance agreements subject to sales and use tax?
A. Again, it depends. In New York, for example, separately stated and reasonable charges for software maintenance agreements are exempt from tax. If, however, the agreement provides for the sale of taxable elements (e.g., upgrades to prewritten software) and nontaxable elements, the entire charge for the agreement is subject to tax unless the taxable elements are separately stated. In Virginia, however, the taxability of maintenance contracts for canned software depends on (1) whether purchase of the contract is required as a condition of the sale of the canned software, and (2) the portion of the contract fee representing software upgrades, whether that portion is separately stated, and whether those updates are delivered electronically.Q. What is the effective date of a remote seller’s collection obligations in New York if they meet the economic nexus thresholds?
A. In January 2019, the New York Department of Taxation and Finance issued an important notice alerting taxpayers of the immediate effective date of a previously dormant but existing provision triggering economic nexus for vendors without physical presence in the state. The provision became effective immediately upon Wayfair’s June 21, 2018, elimination of the prohibition on a state imposing sales tax collection responsibilities on businesses without a physical presence in the state. Thus, the sales tax collection obligations under New York’s economic nexus provision began on June 21, 2018.
The Department of Taxation and Finance has initiated a Voluntary Disclosure and Compliance Program for eligible taxpayers who owe back taxes and haven’t filed related returns to avoid monetary penalties and possible criminal charges. Contact our State and Local Tax services staff for a consultation on your eligibility for this and other opportunities for voluntary disclosures in light of Wayfair and the sweeping changes in economic nexus.
Q. An art gallery is the U.S.-based parent of several foreign subsidiaries located in the U.K. and Asia. Does the U.S. nexus of the parent extend to the foreign subsidiaries?
A. The U.S. presence of a parent company may trigger affiliate nexus for the foreign subsidiaries in certain jurisdictions. However, not all states have affiliate nexus provisions on the books. Independent of the affiliate nexus implications, the foreign subsidiaries must be mindful of their own sales into any U.S. state in light of the extensive economic nexus legislation that has followed since Wayfair. If a foreign subsidiary exceeds the applicable economic nexus threshold in a state, it will have collection and compliance obligations in that state.Q. I am a member of several trade associations in which I pay membership fees. What are the implications of economic nexus with respect to such associations?
A. Economic nexus is certainly a consideration for associations. Associations must be mindful of the various economic nexus thresholds (i.e., the volume of sales by both dollar and transaction amounts). Notwithstanding the economic nexus analysis, the taxability of membership fees varies from state to state. Further, the nature of the membership fee – some membership fees might contain taxable and nontaxable elements – must be reviewed on a case-by-case basis with each state’s law in mind.Q. A taxpayer retains the services of an influencer located in State X for two months in Year 1. The influencer promotes the taxpayer’s products on their website and includes a link to the taxpayer’s website. The influencer will receive a commission for each sale completed by a purchaser referred by the link provided on the influencer’s website. What are the nexus implications in State X for Year 1 with respect to the taxpayer?
A. The taxpayer may have nexus in State X for Year 1. A number of states have enacted click-through nexus provisions for sales of this nature that exceed certain thresholds, which vary from state to state. If State X has a click-through nexus provision on the books, the seller will have nexus in the state if the cumulative gross receipts from sales by the seller to customers who were referred to the seller by all resident influencers receiving a commission from the seller under this type of agreement exceeds the statutory threshold, which is much lower than the threshold for economic nexus. The length of the contract with the influencer (i.e., the affiliate) is irrelevant for purposes of determining a seller’s click-through-nexus. Once click-through nexus is triggered, the seller has nexus in the state for the entire year. Notably, some states have trailing nexus provisions, which would extend the seller’s collection and compliance obligations in the state beyond the year in which they no longer have click-through or economic nexus.
As an example, in Georgia, if the cumulative gross receipts from sales by the seller to customers in the state who are referred to the seller by all residents subject to this type of arrangement exceed $50,000 during the preceding 12 months, the seller has nexus in the state and must collect and remit sales and use tax to Georgia on all taxable sales into the state.
Not all states have click-through nexus provisions in effect, however. Further, several states, including Arkansas and California, have repealed their click-through nexus provisions.
Contact
Our State and Local Tax specialists are happy to help taxpayers navigate the dynamic compliance landscape in all states and municipalities. Please reach out to Scott Smith at 973.364.7720 or [email protected].
Scott Smith
Director, State & Local Tax
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Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.